The Competitive Environment: International Business in Focus 2013-14
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The Competitive Environment:
International Business in Focus
2013-14
The Components of a Company’s Macro-environment
3-2
How Strong Are Competitive Forces?
Objectives are to identify
Main sources of competitive forces
Strength of these forces
Key analytical tool
Five Forces Model of Competition
The Five Forces Model of Competition
3-4
The key elements in Porter’s analysis are
(1) The threat of potential entrants
Depends on the barriers to entry: economies
of scale, differentiation, capital requirements,
costs advantages, access to distribution
channels, laws
(2) The threats of substitute products.
To minimise this a firm could either
differentiate or reduce costs
(3) Threat from the bargaining power of
suppliers.
They can squeeze profits by raising prices or
reducing quality.
(4) Bargaining power of buyers. Relevant
considerations include ‘switching costs’
(5) The degree of competitive rivalry.
Is influenced by market concentration and
structure - but is affected by the other four
forces.
A little more detail..
The Threat of Entry & Barriers to Entry
The threat of entry is low when the barriers to entry are high
and vice versa.
The main barriers to entry are:
Economies of scale/high fixed costs
Experience and learning
Access to supply and distribution channels
Differentiation and market penetration costs
Government restrictions (e.g. licensing)
Entrants must also consider the expected retaliation from
organisations already in the market
Seriousness of threat depends on
Size of pool of entry candidates
and available resources
Barriers to entry
Reaction of existing firms
Competitive Pressures
Associated With Potential Entry
Sizable economies of scale
Brand preferences and customer loyalty
Capital requirements and/or other
specialized resource requirements
Access to distribution channels
Regulatory policies
Tariffs and international trade restrictions
Common Barriers to Entry
There’s a sizable pool of entry candidates
Entry barriers are low
Industry growth is rapid and profit
potential is high
Incumbents are unwilling or unable to contest a
newcomer’s entry efforts
When existing industry members have a strong incentive to
expand into new geographic areas or new product segments
where they currently do not have a market presence
When Is the Threat of Entry Stronger?
There’s only a small pool of entry candidates
Entry barriers are high
Existing competitors are struggling to earn good profits
Industry’s outlook is risky
Industry growth is slow or stagnant
When Is the Threat of Entry Weaker?
Threat of Substitutes
Substitutes are products or services that offer a
similar benefit to an industry’s products.
Customers will switch to alternatives (and thus
the threat increases) if:
The price/performance ratio of the substitute is
superior (e.g. aluminium maybe more expensive than
steel but it is more cost efficient for some car parts)
The substitute benefits from an innovation that
improves customer satisfaction (e.g. high speed
trains can be quicker than airlines from city centre to
city centre)
Competitive Pressures from Substitute
Products
Substitutes matter when customers
are attracted to the products of
firms in other industries
Sugar vs. artificial sweeteners
Eyeglasses and contact lens
vs. laser surgery
Newspapers vs. TV vs. Internet
Concept
Examples
How to Tell Whether Substitute
Products Are a Strong Force
Whether substitutes are readily
available and attractively priced
Whether buyers view substitutes
as being comparable or better
How much it costs end users
to switch to substitutes
There are many good substitutes readily
available
Substitutes are attractively priced
The higher the quality and
performance of substitutes
The lower the end user’s switching costs
End users grow more comfortable with using
substitutes
When Is the Competition
From Substitutes Stronger?
Good substitutes are not readily available or do
not exist
Substitutes are higher priced relative to
performance they deliver
End users incur high costs
in switching to substitutes
When Is the Competition
From Substitutes Weaker?
The bargaining power of buyers
Buyers are the organisation’s immediate
customers, not necessarily the ultimate consumers.
If buyers are powerful, then they can demand
cheap prices or product / service improvements to
reduce profits .
Buyer power is likely to be high when:
Buyers are concentrated
Buyers have low switching costs ?
Buyers can supply their own inputs (backward
vertical integration).
Whether the relationships between industry
members and buyers represent a weak or
strong competitive force depends on
Whether buyers have sufficient
bargaining leverage to influence
terms of sale in their favor
Extent and competitive importance of
strategic partnerships between certain industry
members and the buyers
Competitive Pressures From Buyers
and Seller-Buyer Collaboration
Buyer switching costs to competing brands or substitutes are low
Buyers are large and can demand concessions
Large-volume purchases by buyers are important to sellers
Buyer demand is weak or declining
Only a few buyers exists
Identity of buyer adds prestige
to seller’s list of customers
Buyers have ability to postpone purchases
When Is the Bargaining
Power of Buyers Stronger?
Buyers purchase item infrequently or in small quantities
Buyer switching costs to
competing brands are high
Surge in buyer demand
creates a “sellers’ market”
Seller’s brand reputation is important to buyer
A specific seller’s product delivers quality
or performance that is very important to buyer
When Is the Bargaining
Power of Buyers Weaker?
The bargaining power of suppliers
Suppliers are those who supply what
organisations need to produce the product or service.
Powerful suppliers can eat into profits.
Supplier power is likely to be high when:
The suppliers are concentrated (few of them).
Suppliers provide a specialist or rare input ?
Switching costs are high (it is disruptive or expensive
to change suppliers).
Suppliers can integrate forwards (e.g. low cost airlines
have cut out the use of travel agents).
Whether supplier-seller relationships represent a
weak or strong competitive force depends on
Whether suppliers can exercise
sufficient bargaining leverage to
influence terms of supply in their favor
Nature and extent of supplier-seller
collaboration in the industry
Competitive Pressures From Suppliers
and Supplier-Seller Collaboration
Industry members incur high
costs in switching their purchases
to alternative suppliers
Needed inputs are in short supply
There are only a few suppliers of a specific input
When Is the Bargaining
Power of Suppliers Stronger?
Item being supplied is a commodity
Seller switching costs to alternative suppliers are
low
Good substitutes exist or new ones emerge
Seller collaboration with selected suppliers
provides attractive win-win opportunities
When Is the Bargaining
Power of Suppliers Weaker?
Usually the strongest of the five forces
Key factor in determining strength of rivalry
How aggressively are rivals using various weapons of competition to improve their market positions
and performance?
Competitive rivalry is a combative contest involving
Offensive actions
Defensive countermoves
Competitive Pressures
Among Rival Sellers
What Are the Typical Weapons for Competing?
Lower prices
More or different
performance features
Better product performance
Higher quality
Stronger brand image and
appeal
Wider selection of models and
styles
Bigger/better dealer network
Low interest rate financing
Better or more ads
Stronger product innovation
capabilities
Better customer service
Stronger capabilities to
provide buyers with custom-
made products
3-26
Competitors are active in making fresh moves to improve market
standing and business performance
Slow market growth
Number of rivals increases and rivals are ofequal size and
competitive capability
Buyer costs to switch brands are low
Diversity of rivals increases in terms
of visions, objectives, strategies,
resources, and countries of origin
Outsiders acquire weak firms in the
industry and use their resources to transform
new firms into major market contenders
What Causes Rivalry to be Stronger?
Industry rivals move only infrequently or in a
non-aggressive manner to draw sales from rivals
Rapid market growth
Products of rivals are strongly
differentiated and customer loyalty is high
Buyer costs to switch brands are high
There are fewer than 5 rivals or there are
numerous rivals so any one firm’s actions has
minimal impact on rivals’ business
What Causes Rivalry to be Weaker?
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